Lessons from Economic Crises in Argentina

Nick Giambruno: Joining me now is David Galland, the managing director of Casey Research. His internationalization story, which involved moving his life and his family from the US to Argentina, was recently featured in Internationalize Your Assets, a free online video from Casey Research. He is perfectly suited to help us better understand some of the important lessons in internationalization that Argentina offers. Welcome, David.

David Galland: Nice to be here.

Nick: First, why don't you give us a little background about the Argentine people and how they have learned to deal with their government and recurring financial crises?

David: A good way to think about Argentina is that it is an immigrant society, very much like the US, except that the dominating culture emerging from the melting pot was Italian. This is why Argentines tend to be famous for their dark good looks, vibrant culture, and excellent food. Unfortunately, they also inherited "Italian style" politics. I think that's a useful context for understanding the consistent dysfunctioning of the Argentine government.

This at least partially explains Argentina's long love affair with the Peróns. The country had one of the most successful economies in the world until Juan Perón came into power and destroyed it. And, with some rare bright spots, it's gone through long periods of financial crisis ever since. Despite that, the Perónistas are still very much in charge.

If you look at the history of financial crises in Argentina, you will see there is almost no 10-year period when there isn't a financial crisis. As a result, the population has become extremely resilient in the face of financial crises. When you mention the faltering state of the economy, every Argentine you talk to will shrug and make a comment along the lines of, "No problem; this is Argentina, we're used to it." In other words, they have become fatalistic about such things.

But that doesn't mean they are complacent, because thanks to their long experiences with financial crises Argentines have become masters at dealing with things like inflation and ridiculous government policies. For the most part, the government is highly ineffective, and so the Argentines just ignore it. Reasonably intelligent people always figure out ways to work around whatever the latest decree the government comes up with, then they tell their family members and friends. The word spreads so that in no time at all, the populace at large has figured out how to deal with the government's latest misstep, as often as not turning it to their personal advantage. As a consequence, there is a very robust underground economy; if people can do business off the books, they do. Argentines pride themselves on their ability to outsmart the government.

Nick: How can the actions of the Argentine government give us insight into what a desperate government is capable of and what might be in store for the United States?

David: The current Argentine government is dominated by true believers – young people who have that idealistic notion of equality for all, and who believe that government mandates can fix anything that ails. They are hardcore socialists, leaning towards communism. But, as is the case in the United States, they really don't know what they are doing and so pursue policies that are incredibly shortsighted. They are uninformed as far as history and economics are concerned and blunder from one harebrained policy to another. There is literally nothing that they will not try.

It is like a textbook case in government gone mad.

They have stolen the retirement accounts, devalued the currency, and put capital controls in place. There are trade controls so that people can't import necessities into the country, but instead, have to manufacture them locally, with the government giving monopolies to their friends. They have price controls, which force the local supermarkets to not raise their prices. This will ultimately lead to shortages. And there are already shortages of certain items. They didn't like an opposition newspaper, so they nationalized the newsprint manufacturing industry. In fact, just about every single thing that you could do to screw up a country, they have done. It is comical to see the extremes they have gone to. For example, in Argentina, if you publish an inflation statistic that differs from of the official government numbers, you could be hit with a $100,000 fine. I had never heard of this anywhere else – except maybe in communist Russia. They are really completely out of control and the country is spinning off into la-la-land. Frankly, I love living right in the midst of all of it.

There is a lesson to be learned from all of this, and I think it is a very important one. When it comes right down to it, any government – not just the Argentine government, but the US government as well – will simply do whatever it thinks it needs to do to keep the status quo intact, with no moral or ethical considerations.

In the case of Argentina, and the United States as well, it is a testament to the legacy strengths of the country – minerals, an educated population, agricultural land in abundance, energy resources – that despite a history of bad governance, the economy is still remarkably robust. People living outside of the country would be forgiven, based on the media reporting, for thinking the place is a basket case – but, against all odds, it isn't. To a large extent that is because the government's policies have chased much of the economic activity underground.

Nick: I think something that exemplifies some of the points you've just made was the recent debacle with the minister of the economy. During an interview he was asked a very straightforward question on the Argentine inflation rate. He uncomfortably stumbled through his answer and cut the interview short [Editor's note: You can read more about that here]. How was that received in the country?

David: It was widely reported. At this point, the Argentines have a great sense of humor about their government, as in the majority of them think it's a joke. That said, people are fed up too. In the seven months that we have lived down here, there have been two massive, countrywide protests totaling around two million people. That's about 5% of the country's population. In most countries that would be enough to send a dictator and the government scrambling for their private jets to get out of town.

The Kirchner government, however, has basically said, "Let the people protest. We don't care; it's just a bunch of noise." To a certain extent, that is true. But it's getting to the point where one of these days it's going to boil over. In addition to the middle class, the unions – which have traditionally been a bastion of support for the Perónistas – are starting to show up in the streets as well. If the government's purported friends are starting to protest against them, then you have to wonder how much longer the current regime can last.

Nick: Given the situation you just described, what's it like for you personally to be living on the ground in a country that is going through all this? Does the inflation work to your advantage if your money is not denominated in pesos and not located in the country?

David: Yes, absolutely. Argentina is really two different countries. First, there is Buenos Aires [BA], which is a big city and contains by far the largest percentage of the country's population. In BA there is a bit of crime, and in certain parts of the city you are going to have more crime, but generally speaking, you would be surprised to know that you were in the beating heart of a crisis. Restaurants are full; the stores are open and full of very nice stuff. Second, there are the provinces, which are mostly rural and agriculturally oriented. Here the central government's authority is weak, and the people are relaxed. The quality of life is tremendous. This is not just the case for Americans, or people who are non-peso based; it's pretty much for everyone. Food in a place like Cafayate, where we live, is so cheap it's almost free. You can walk out of a store with a huge bag of fresh produce and it's going to set you back only a few bucks. A kilo of fine tenderloin will cost you maybe five dollars. Back here in the US a couple of days ago I paid $22 for less than a pound of steak. Then there's the cost of labor. In Argentina, we have an extremely competent maid who comes in for five hours a day, five days a week and does all the cleaning and laundry – drudge work that people in the Western world have learned to view as an unavoidable part of life – and the cost is all of about $40 a week.

So, despite the overarching reality that the government is dysfunctional and that this is currently being evidenced in the inflation, the quality of life in Argentina for anyone with a few bucks is very, very high.

When I first arrived in the country, I was expressing bewilderment about how screwed up the government was and all of their stupid policies to a friend of mine who owns a local café. After listening patiently, my friend looked at me and said, "David, is the sun not shining, is the wine not plentiful, and is the food not good? So what are you worried about?" It's a fatalism, but it's also a realism that the people don't worry about the government. And because the government is so inefficient, people can, for the most part, ignore it with impunity. That's not the case in the Western countries where the government has become very adept at using the latest technologies to keep an eye on the populace.

Another friend of mine, a retired successful businessman said, "You know, Argentina is the best country in the world. We just need a little better government." And I looked at him and I said, "Just a little better?" And he said, "Yeah, just a little better. We don't want them to become too efficient, then we wouldn't be able to get away with everything we are able to get away with."

That said, there are obviously middle-class and lower-class people who are struggling under the inflation. Again, this is especially the case in the big city where the social safety net of friends and family is not quite as tightly knit, and where ready access to the straight-from-the-farm produce is not as easy.

For anyone whose net worth isn't tied up in pesos and who keeps most of their money out of the country, the current inflation has been a real boon.

You can go to the best restaurant in town and your entrée is going to cost you five to seven dollars, and this is a very good restaurant. A bottle of wine that would cost you $40, $50, $60 in the States, costs you maybe $5-6. The quality of life is incredible. A lot of that has to do with the exchange rate, which has been as much as ten pesos to the dollar recently. When we first started coming down here, it was like three and a half. In short, the inflation is a real benefit if you don't have your savings and income tied up in the peso.

Nick: From what it sounds like, despite having capital controls, those measures are mostly aimed at people trying to take so-called hard currency, like US dollars, out of the country. For those bringing them into the country, it doesn't appear that there is much of a problem. Is that the case?

David: You would think they would want more US dollars to flow into the country, but the government policy is so balled up they have put up some barriers to bringing money into the country. That said, there are simple mechanisms you can use to get around the restrictions that are completely legal. One of which involves buying Argentine bonds on the international market and selling them back in Argentina. As for the Argentines who want to get their money out of the country, they have to be extra clever, but they are very good at this kind of stuff. For me, dealing with this situation has been a great experience. Unlike in the US, where everything is straightforward and the rules generally make sense, in Argentina it's a very fluid situation. I love the fact that I feel like I'm getting a degree in economic crises and how to operate in one.

Nick: Do Argentines favor gold? What about getting gold in and out of the country and buying or selling it in the country?

David: This is a very interesting question. I've asked that question in the context of economic crises around the world and throughout history. Gold only comes in as sort of the asset of last resort. We did a crisis panel at one of our conferences a couple of years ago, and we had people who had been through the hyperinflation in Zimbabwe and Serbia, and we also had someone from Argentina. I was moderating the panel and asked them all what factor gold played in preserving their wealth. Everyone said it was not a factor. Instead, they all used whatever strong currency they could get their hands on. In the case of Serbia it was the deutschemark. In the case of the Zimbabwe it was the South African rand, and in the case of Argentina it was, and still is, the US dollar.

In Argentina, the whole country revolves around US dollars; it's their medium of exchange and how they preserve their cash. For now at least, the US dollar is king in Argentina. Personally, I exchange my dollars in a coffee shop where I slip behind the cashier's counter and this very cute girl does the exchange from stacks of pesos and thousands of dollars. At some point, if the dollar starts to really collapse and there isn't a suitable regional or local currency to take its place, I think you will see more transactions in gold.

As far as gold transactions in the country, there are dealers in Salta City, which is the nearest big city to us. Private transactions can also be arranged. In Buenos Aires, of course, you can buy and sell gold easier, but it's just not part of the culture at this time.

Nick: Turning to real estate, there are many people who are potentially interested in Argentine real estate as we approach what appears to be the bottom of the current crisis. What are your thoughts?

David: I'm a big fan. We own a lot of real estate in Argentina, most of bought when it was a lot cheaper. If you are a dollar-based investor and you can get your money into the country at a good exchange rate, then the real estate prices are very reasonable. That said, I would add that the biggest market for Argentine real estate currently is for Argentinians, because they have to find a place to put their currency before its purchasing power erodes further. Right now it is depreciating probably at 30% to 45% a year. My general sense is that people who have their money outside of the country aren't in a rush to bring it into Argentina. I can't fault them for that.

As far as I'm concerned, if you can afford to live in La Estancia de Cafayate and you don't, you are a fool. But that's a lifestyle decision, not a pure investment decision. Cafayate is a really beautiful place, with all the amenities and a great community of people. It's like the Napa Valley 80 years ago. Most people who are looking to make a pure investment right now should probably wait a bit longer. I don't think the current crisis is over yet.

Nick: Last year the government made it illegal for people to use US dollars in real estate transactions. Now, as you mentioned, not everybody follows these types of rules. Is this something that's adhered to? It could actually work to your significant advantage, if you are foreign investor or someone who is looking to make a lifestyle decision to buy property in Argentina, if there is a further significant decline in the peso and you are forced to use pesos in real estate transactions.

David: Absolutely. Provided you can get your money into the country and get a good exchange rate, which you can, using that bond trade method I mentioned previously. Cafayate is a small valley with a limited amount of real estate available. It is very much on the upswing, and prices are definitely going higher in dollar as well as peso terms. In terms of putting your money into a pure investment or real estate speculation, I don't think you could go wrong buying in Cafayate at this point, especially if you get in at the right exchange rate. You have to have the right mentality though, as it is not a traditional investment.

Nick: What is the endgame with this current crisis? Do you think there will be devaluation of the official exchange rate or some other wealth-confiscation measures? What do you think will signal that we're at the bottom?

David: I don't think you are going to see wealth confiscation. The foreign percentage of ownership of the Argentine economy is pretty small, so I don't think they would go after wealthy foreigners. Could they go after the wealthy Argentines? It's possible, but Argentina is not a big country and everybody knows each other. Most of these government officials have managed to steal themselves enough money to become part of the elite they would potentially be targeting. So I don't see wealth confiscation coming. I think the endgame will come when you get three or four million people in the streets and the government realizes it has to do something. Maybe they would give into the pressure for a devaluation of the peso.

Regardless, in the next election this October, I think there is a good chance the current government will get voted out. If the new government isn't completely stupid, then I think you could end up with a real economic boom. That's the history of Argentina, a crisis followed by a boom. I don't think we are at the bottom of the current crisis yet, but I think we are getting there.

Nick: All right David, thanks for your time and insight into the situation. There are indeed many lessons that Argentina can teach for those wise enough to absorb them.

David: My pleasure.

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